5. Valuations are historically strong predictors of long-term investment opportunity
Leading into the most recent correction, we wrote extensively about the relatively high valuations of U.S. stocks. Now, recent pull backs have reduced those valuations, increasing expected returns. Further, previously attractive valuations for International stocks have now become even more attractive, from a fundamental standpoint.
As Howard Marks said in “Mastering the Market Cycle”: “Ceterus paribus, or all things being equal, the outlook for returns will be better when investors are depressed and fearful (and thus allow asset prices to fall) and worse when they’re euphoric and greedy (and drive prices upward).”
Over time, economies tend to grow, company profits tend to increase and markets tend to rise. We expect global economies and markets to grow in the coming decades. As such, current investors should be more optimistic toward long-term expected returns after market drawdowns, rather than after market appreciation.
This means stocks may look more attractive now for long-term investors than they did in September 2018. As such, current investors should be more optimistic toward long-term expected returns than they likely were in September 2018.
Trailing 12-Month PE
Source: Bloomberg. As-of 12/31/2018
Focus On Financial Goals
Often, investment portfolios are the focus of an investor’s financial picture. While investment portfolios are an integral part of the overall financial picture, we encourage investors to keep their focus on long-term financial goals. Investment portfolios are a sophisticated tool designed to help investors reach their financial goals, not a bank account for short-term cash needs.
Volatility is expected in investment portfolios and necessary to allow for long-term investment appreciation. As discussed, investors are risk-averse in nature, meaning they don’t like to see portfolio values fluctuate. However, it is a normal part of the investment process.
ValMark Advisers Inc. is the manager of the TOPS Portfolios of ETFs. ValMark started managing "TOPS" separately managed accounts of ETFs in 2002. The firm manages more than $5.1 billion in ETFs for retail and institutional clients in multiple investment products. Email: [email protected]; phone: 800-765-5201. For a complete list of relevant disclosures, please click here.